Expect Unexpected Events — and Their Effects

Unexpected events can be expected. Or should be. And doing so can help a retiree to be prepared. So suggests a recent report that has implications not only for retirees but also retirement plan professionals.

Anna Rappaport, Society of Actuaries Committee on Post-Retirement Needs Chair,” looks at how retirees handle future risks and unexpected events and the problems they can cause in the report “Shocks and the Unexpected: An Important Factor in Retirement.” Life is a mixture of the expected and the unexpected, says Rappaport, arguing that “how well retirees handle the unexpected is a big determinant of how well they will do overall.” The report is also intended for retirement experts, plan developers and service providers.

Shocks and unexpected events, for purposes of the report, are events that imperil retirement plans because they cause major disruptions and heavy financial burdens. Examples of such events include death of a spouse, major home repairs, sudden medical expenses and entering a long-term care facility.

Rappaport writes that the SOA found that many people are not ready for the unforeseen and the costs they entail, and that the impact of shocks is greater for low-income people. And hardship increases with the number of unexpected events an individual and/or family experiences. The most troublesome events, and the ones which people had the hardest time handling included needing and paying for long-term care and divorce that takes place after retirement, as well as fraud, bankruptcy and foreclosure.

Assets and spending decline, the researchers found. More than one in three, Rappaport reports, saw their assets decline by one-quarter or more after a shock, and more than 10% cut their spending by half or more.

But despite the shock and hardship of such events, Rappaport suggests, there is good news. “Retirees are resilient,” she writes, and “are willing to adjust.” Many, she says, are doing very well and better than SOA researchers expected.

Researchers found that planning systems generally incorporate a means of defining the resources necessary to meet expenses that are expected during retirement expenses, but help in preparing for unexpected expenses less frequently.

Rappaport includes some suggestions for things individuals can do to prepare for the unexpected. Among them:

• Make a list of possible unexpected expenses and risks, and expectations for dealing with them.

• Be prepared for dental expenses.

• Plan for long-term care.

• Avoid the use of high cost debt.

• Evaluate whether current housing will continue to be affordable.

• Use caution in providing financial help to family.

There are things that benefit plans and service providers can do to help with preparation for unexpected events as well, Rappaport says. Among them:

• Provide tools or offer information about the use of publicly available tools.

• Provide access to professional advice.

• Explore financial wellness programs and ways of helping employees handle debt.

• Offer access to coverage for long-term care and disabilities.